"The defined purpose of the Government, the cornerstone of the coalition, the one test they set themselves - to balance the books and get the debt falling by 2015 - is now in tatters," he said.

Anti-poverty campaigners also reacted with anger to the welfare squeeze, arguing that it would punish working families "already on the edge".

The move breaks the link between pay-outs and inflation and means up-ratings are likely to remain below inflation in future years, gradually reducing their value over time.

It will have to be introduced via new legislation and a Welfare Uprating Bill will be tabled shortly - creating a political dilemma for Labour.

Job Seekers Allowance, Employment and Support Allowance and Income Support as well as elements of Child Tax Credit and Working Tax Credit will all be subject to the cap.

Child benefit will continue to be frozen next year, and will then rise by 1% annually for two years from April 2014.

The TUC calculated that the combination of real-terms cuts to child benefit announced in the Autumn Statement and in previous budgets, will cost a family with two children more than £1,000 over the course of the Parliament.

And new real-terms cuts to tax credits will have an even bigger impact. A family with two working parents on a combined income of £40,000, two children and childcare costs of £300 a week will lose around £2,800 a year by 2015/16, the TUC said.

TUC general secretary Brendan Barber said: "This Chancellor has presided over one of the biggest ever squeezes on the budgets of working families.

"Small gains on fuel and the personal allowance are dwarfed by the swingeing cuts to child benefit and tax credits that many millions of families rely on to get by."

Individual unions also hit out at the Chancellor's measures.

Unite general secretary Len McCluskey said: "George Osborne's credibility is in tatters. His addiction to austerity has strangled growth and risks not just deferring recovery but trashing the economy altogether. He is cutting his way to national calamity."

But business leaders welcomed the boost to infrastructure, investment and exports.

CBI director-general John Cridland, said: "£5bn on near-term infrastructure, like the tube to Battersea, half a billion a year tax relief for small firms, and £1.5bn extra export support should boost investment and create jobs.

"The Government now has everything to prove by delivering. Businesses need to see the Chancellor's words translated into building sites on the ground."